The euro area’s economic pulse is coming back

The global pandemic has left deep scars on economies across the globe. This is certainly true for the euro area, which saw widespread lockdowns after the outbreak of the pandemic in the spring of 2020. As a response, a host of fiscal policies provided strong support across economies, and monetary policy has been maintaining a very accommodative stance. These have been major factors in the economic recovery of the euro area and the most recent bank lending survey by the European Central Bank is confirming a picture of vigorous economic revival.

In particular, the survey points to solid demand for credit by firms and consumers; strong demand for housing loans; and a levelling-off in the tightening of credit standards for enterprises. At the same time, it highlights possible risks and challenges moving forward, especially the delicate nexus between low interest rates and higher house prices, through which the monetary policy could be contributing to new risks to financial and economic stability.

It is not reassuring that the survey results indicate a concurrent slight loosening in lending standards for housing loans. An explosion in credit coupled with weaker lending conditions can open the door for undesirable credit risks to seep into banks’ balance sheets.

The survey also found that large firms saw a greater degree of loosening in credit standards than small and medium-sized firms, illustrating the continued struggle of smaller enterprises with the fallout from the pandemic and hinting at the need for a continued fiscal support, especially for small businesses.

Learn more from the October Monthly Briefing on the World Economic Situation and Prospects. 

Photo by Maryna Yazbeck on Unsplash